One Reason Why I Wouldn’t Buy ARM Holdings plc Today

Today I am looking at why rising competition looks set to compromise ARM Holdings’ (LSE: ARM) (NASDAQ: ARMH.US) earnings forecasts.

Intel gathering pace inside key segments

Chip designers like ARM Holdings are having to face up to the reality slowing smartphone and tablet PC growth rates, with product saturation in key Western geographies prompting doubts over the extent of new product uptake in the coming years.

As well as having to contend with this significant demand shrinkage, the Cambridge-based firm is also battling against rising competition in these critical sectors. So reports in recent days that tech rival Intel (NASDAQ: INTC.US) ARM Holdingsis due to have its technology implanted in Samsung’s newest smartphone, slated for release later this year, will come as a major blow to the company if realised.

According to South Korean newspaper DDaily, the world’s biggest mobile phone manufacturer is set to launch its latest model using Intel’s impressive Moorefield processors, technology which packs impressive memory speeds, exceptional graphics capabilities and blistering application performance even when the battery is running low.

The American microchip manufacturer has long lagged its peers in the mobile device market, but the company’s Silvermont architecture formally announced in May last year appear to have finally launched Intel into the big leagues.

Indeed, these efforts culminated in the unveiling of the company’s Moorefield and Merrifield chips at the Mobile World Congress in February, technology which the firm feels confident will court huge interest from the likes of Samsung, Apple et al.

And Intel underlined its aggressive strategy to take on ARM Holdings and Qualcomm — which has long been Samsung’s go-to parts provider — in their own backyard by offering to sell its hardware at just $7 per chip, marginally above the cost of production.

Back in the tablet market, Intel is also looking to supercharge its exposure to this segment — particularly in the growth hotspot of China — and is seeking to place its components in more than 40 million devices in 2014, up from 10 million last year.

City analysts expect ARM Holdings to post earnings growth of 14% and 22% in 2014 and 2015 correspondingly, readings which result in bloated P/E multiples of 37.4 and 30.6.

These figures shoot considerably above the watermark of 15 which represents reasonable value, and like all entities dealing on lofty readouts, I believe that the business is in jeopardy of a severe price correction should its earnings prospects come under the spotlight.

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> Royston does not own shares in any of the companies mentioned in this article. The Motley Fool has recommended shares in ARM Holdings and owns shares in Apple.